Invoice Factoring - How does it work and how can you apply?
Free up cash from your unpaid invoices to boost your business's cash flow and ease the strain of managing credit control.
Free up cash from your unpaid invoices to boost your business's cash flow and ease the strain of managing credit control.
Instead of waiting weeks or months for your invoices to be paid, advance a percentage of their face value within as little as 24 hours.
Managing your sales ledger and credit control processes can be time consuming. With invoice factoring, the factoring company takes over these time-consuming tasks for you.
Invoice factoring providers are experts in credit control, so they can help to ensure your customers do not pay their invoices late.
Invoice factoring provides immediate access to funds, helping your business to maintain a healthy cash flow and meet financial obligations.
Invoice factoring is a type of invoice finance that enables a business to improve their cash flow by accessing cash for their unpaid invoices. The business effectively uses their debtor book of unpaid invoices as security for the loan from an invoice factoring company. This allows businesses to access funds quickly rather than waiting for customers to pay their invoices. A key feature of invoice factoring is that the factoring company will take over the responsibility of collecting payment from the customer.
1. Invoice your customers
Continue your business operations as usual, engaging in everyday activities such as selling goods or services and issuing invoices to customers.
2. Submit invoices
Once you generate invoices for your customers, you submit them to your selected invoice factoring provider for processing. This may be all the invoices in your debtor book, or only a portion of them, depending on your specific agreement with the factoring company.
3. Get your advance payment
The invoice factoring company instantly advances a percentage of the invoices total value, typically this is 90%. This enables your business to maintain cash flow without waiting for customer payments.
4. Transfer the responsibility of invoice collection
Your factoring partner will handle the management and collection of the factored invoices. This offloads the burden of chasing payments from you, freeing up your time to concentrate on your core business functions.
5. Receive your final balance
Once the customers pay their invoices, the factoring company deducts its fees and remits the remaining amount to your business.
6. Gain ongoing access to finance
As your customers pay off their invoices, the funds are used to pay down your advance, making new financing available under the same arrangement. This cycle ensures a continuous flow of capital based on your outstanding receivables.
To be eligible for invoice factoring, your business will need to:
| Feature | Invoice factoring | Invoice discounting |
|---|---|---|
| Factoring company manages payments | ✓ | x |
| Confidential from customers | x | ✓ |
| Lender interacts with customers | ✓ | x |
| Immediate access to funds | ✓ | ✓ |
| Additional service fees charged | ✓ | x |
The cost of an invoice factoring facility is specifically tailored to each business and considers factors such as your business's credit score, your customers' creditworthiness, and the size of the facility. Typically, the facility will incur two types of costs: interest charges and service fees. These costs will be specific to your business and the invoice factoring company involved. If you receive an offer from an invoice factoring company through Capitalise, our funding specialists clearly explain all associated costs, helping you make an informed decision.
| Advantages | Disadvantages |
|---|---|
| Factoring provides quick access to cash, often within 24 hours, improving cash flow and helping you manage day-to-day operations. | Your business receives less money than the full value of the invoice. |
| Unlike loans, factoring does not create debt as it's an advance on receivables. This means it can sit alongside other borrowing facilities on your balance sheet. | Loss of control of your debtor book can impact customer relationships if the factoring company pushes too hard on an overdue payment. |
| It can be an alternative option to a business loan if your business doesn’t have a strong credit score, as approval for factoring is based on the creditworthiness of your clients, not your own company's credit score. | The application process depends on the creditworthiness of your customers rather than your own business, making approval dependent on factors outside your direct control. |
| The risk of customer late or non payment usually transfers to the factoring company. | As the factoring company will assume credit control, customers will know that you are using an invoice factoring facility. |
There are different types of invoice factoring depending on the scope of factoring and the allocation of risk.
Businesses can use spot factoring to factor individual invoices as needed, gaining flexibility without committing to factor their entire debtor book. This contrasts with a more comprehensive approach where a company factors all of its receivables.
In terms of risk distribution, there are two main types: recourse and non recourse factoring. Recourse factoring means that the business retains the risk if a customer fails to pay an invoice and the company must reimburse the factoring company for the unpaid amount. Whereas non-recourse factoring shifts the risk to the factoring company. This means that if a customer does not pay back, the factoring company absorbs any bad debts, providing the business with a more secure solution.
At Capitalise, we work with over 100 UK business lenders, many of which specialise in invoice factoring. Our online platform facilitates a comparison of loan terms and conditions from multiple lenders, ensuring that you can secure the right finance for your business. Sign up for free to search for invoice factoring options today.
Capitalise is a UK based platform, our mission is to help businesses to take control of their financial health. We support business owners through our FCA regulated platform, an easy way for businesses to access over 100 lenders and compare their loan products. Our advanced platform makes intelligent matches and ranks lenders, based on their past successes, to help businesses select the best funding solution.
Capitalise also enables businesses to check their own Experian business credit score to better understand their financial health. Plus businesses can check the credit profiles of the companies they work with to reduce risk.
You have the flexibility to choose how you manage your invoice factoring. If you prefer to factor a single invoice or a specific portion of your debtor book, you can opt for spot factoring. This option allows you to select individual invoices, which can be especially useful for managing cash flow without committing your entire accounts receivable.
Alternatively, if it suits your business needs better, you can choose to factor your entire debtor book. This approach might be more efficient if you have a large volume of accounts receivable and want to streamline your financial management.
If a customer fails to pay an invoice, the consequences depend on whether your agreement with the factoring company is to have recourse or non-recourse factoring:
Invoice factoring is popular in industries where long invoice payment terms are standard, such as manufacturing, wholesale, transportation, and recruitment agencies.
Invoice factoring companies typically assess the creditworthiness of your customers—the invoice debtors - rather than your own company's credit history. This approach means it can be possible to get invoice factoring with a low business credit score.
Unlike a business loan, invoice factoring does not create debt in the traditional sense. It is the sale of an asset (the receivables). This means it doesn't involve your business borrowing more money and therefore doesn't affect the debt levels of a company.